Transcripts

The Impact of Interest Rates in the E.U. on the U.S.

PAUL KANGAS: There was much ado about interest rates across the pond today in Europe and United Kingdom. The European Central Bank kept short-term rates at a six-year high and the Bank of England also kept its key rate unchanged. As Suzanne Pratt reports, experts say the ECB's reluctance to cut rates is having ramifications for the U.S. economy.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is an old saying on Wall Street -- when the U.S. sneezes, the world catches cold. Some experts now say, when it comes to the effects of monetary policy, the germs may be flowing both ways across the Atlantic. Today's interest rate decision by the European Central Bank comes at a bad time for America. Not only is the dollar at an all-time low against the euro, which experts blame on global interest rate differentials, but the U.S. is also on the brink of recession. Is it the responsibility of European central bankers to prop up the U.S. economy? Experts say of course not. But economist Bob Brusca says the ECB's reluctance to cut rates is exacerbating economic conditions.

ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS: That is definitely contributing to the strength in the euro or you could call it the weakness in the dollar and that's contributing to higher oil and higher gold prices and higher commodity prices. And they're part of the problem; they are not part of the solution right now.

PRATT: The U.S. Federal funds rate stands at 3 percent, while the ECB's benchmark rate remains at 4 percent and the Bank of England's is 5.25 percent. ECB President Jean Claude Trichet (ph) today quashed investors hopes for a cut anytime soon, saying quote, the firm anchoring of inflationary expectations is of the highest priority. To understand why the ECB is not following the Fed, experts say it's important to look at monetary policy guidelines. In the U.S., the Federal Reserve has a dual mandate of encouraging growth and fighting inflation. By contrast, the ECB's mandate is to maintain price stability above everything else. Currently, euro zone inflation is running at an annual rate of 3.2 percent, its fastest pace since the euro was launched nearly a decade ago. Economist Steve Ricchiuto says, if the ECB doesn't get on board soon with rates, commodity prices will continue to soar.

STEVEN RICCHIUTO, FOREIGN EXCHANGE STRATEGIST, HANDELSBANKEN CAPITAL MARKETS: Those commodity prices are then driving up domestic inflation, causing the Federal Reserve to be reluctant in its interest rate decisions and causing the Federal Reserve to warn the markets that, if inflation continues to move higher that they will have to reverse the stimulus at some point in the not-too-distant future and reverse it almost as quickly as they put it in. And that's a big problem for the economy and for the Fed over time.

PRATT: Nevertheless, some experts believe the ECB will follow the Fed on rates as early as this summer -- first, to stop the euro's alarming rise and second, to halt the spread of recession across the Atlantic. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.